A Joint Venture “JV Agreement” is a strategic joint effort on an ongoing basis or for implementation of a specific project. Joint ventures provides a practical approach to work with other companies and combine various fields of expertise for specific or all-purpose commercial goals. It serves as a legally enforceable contract to express the intention of all parties to create a joint venture on certain crucial terms and conditions as set out therein.
The main reason behind businesses coming together and forming a joint venture is lack of expertise, resources, technology, or access to a particular market needed to successfully pursue the project on its own. By joining forces with another firm, each party may use the resources of the other participant company without using a lot of cash to do so and achieving economies of scale.
A joint venture agreement usually outlines the conditions and commitments of the participants as well as their common objective of making profit. Each party to a contract participates in the risk and benefit, and by putting their agreement in writing, they can reduce disagreements and probability of arising of disputes.
The document can be customised to describe the essentials of the joint venture, including its business goals, the roles and responsibilities of the parties involved, any investments made by either party, the joint venture's formation date, any termination clauses and dates, as necessary, and any agreed governance practises for the joint management of the venture.
Access to Resources and Capital
Through a joint venture, each party can utilise the resources of the other participant(s) without expending a lot of capital
Another advantage of joint ventures is that it distributes the risk factor. In a joint venture, each business provides a percentage of the funding required to bring the goods or services to market, easing the burdensome cost of research and development
Flexibility in Operations of Individual Parties
A joint venture offers a degree of flexibility in business strategies since the firms engaging into the venture are not compelled to establish a new company organisation under which the project is subsequently completed. Also, while the joint venture is in existence, JV partners are not required to forego control of their respective entities to a third party or to disrupt their regular commercial activities
Access to unexplored markets
Businesses have great chance to quickly enter new and unexplored markets
Achieving Economies of Scale
The participants to a joint venture share the economies of scale as a result through the alliance by growth in output level and having an advantage over its costs.
Contents of a Joint Venture Agreement
There are several components that must be included in each joint venture agreement. Along with listing every member and their contact details, the following crucial sections must be included in the JV Agreement:
Major Clauses of Joint Venture Agreement
1. Business Information: Two distinct entities are formally joined for a particular purpose via joint venture agreements. The agreement should clearly incorporate the basic information of the parties involved, their objectives and goals pertaining to the proposed business, how to operate the business and other information that is essential to the businesses involved
2. Nature of Relationship: Defining the nature of the connection between the parties to the joint venture is one of the most crucial aspect of the joint venture agreement. When the partners do not initially agree on how the relationship is meant to work, potential disputes can result out frequently at the stage of implementation.
3. Type of Joint Venture: A joint venture can be formed on a temporary basis by forming a contractual arrangement, or by forming a separate entity specifically for operational endeavours.The four most popular forms of joint ventures are listed below:
4. Contribution of Parties: Contribution of parties must be unambiguously specified in the joint venture agreement. This is done in order to make sure that each party is aware of what they will be devoting to the project and that they are both obligated by that promise. A party's commitment need not be restricted to money. It may commit resources, anything of value, or other assets (including real estate, machinery, or intellectual property).
5. Objective of the Agreement: For a contract to be legally binding, it must have a distinct goal or purpose. This might involve forming a new company as a joint venture or joining forces contractually with other companies. Consortiums are teams of two or more companies that collaborate to accomplish a common objective of earning profits and building market credibility.
6. Roles & Responsibilities of the Parties: All partners' roles, expectations, responsibilites and obligations are clearly outlined in the JV agreement. Each entity may have different obligations and responsibilities. In many joint ventures, one organisation contributes more of a certain asset or resource than the other, however majority of the joint ventures are entered at a 50/50 stake.
7. Distribution of Earnings: The agreement must specify how the businesses will distribute earnings fairly
8. Confidentiality: It is recommended to provide that parties who receive confidential information about the company or other parties to the agreement keep such information confidential, and to ensure that they cannot use the information for any purpose that may be prejudicial to the parties to the agreement as a whole.
9. Termination: This clause provides for termination by the either ways:
Any party willing to terminate the agreement on the ground of the clauses mentioned above is required to issue a notice to the other party.
10. Indemnification: Indemnification clause provides for the limits of liability and the process for reimbursement of indemnity claims and is considered as the most scrutinized clause in case of disputes, a precise drafting is required to ensure the parties interest are adequately covered in case of issues relating to the transactions emerge. In this clause the parties to the agreement promise to indemnify the other parties against any losses, occurred because of wrong and malafide information in the warranties and representation clause.
11. Dispute Resolution and Arbitration: A joint venture agreement should set out the process for the resolution of any disputes between the parties. This could be simply that disputes are referred to the courts under the respective jurisdiction. Alternatively, the Parties can also include the Arbitration Clause in this agreement. Under Arbitration, any dispute that arises between the parties will be referred to an Arbitrator appointed mutually by parties to the agreement. The decision of the Arbitrator will be final and binding on the parties to the Agreement.
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